Missed Opportunity

Originators of private student loans can't seem to catch a break. Two years ago, the federal government stopped guaranteeing these loans, leaving them unsecured; more recently, there's been a push in Congress to make student loans dischargeable in bankruptcy. The loans are also attracting scrutiny from the recently empowered Consumer Finance Protection Bureau.

So while there would seem to be plenty of opportunity to step up underwriting - and securitizing - of private student loans, in fact the opposite is happening. Education costs continue to rise and the interest rates on government-subsidized student loans are set to rise, too. This potentially makes private student loans more attractive. Still, the ranks of originators of private student loans continue to shrink, in no small part because, as Nora Colomer details in this month's cover story, capital markets are loathe to fund them. And many of the remaining originators are banks that keep the loans on their books, rather than securitizing them.

While the outlook for student loan ABS is dim, there are some bright pockets in the securitization market, such as CLOs and structured settlements.

On the CLO front, middle market deals are making a comeback, but unlike those minted before the financial crisis, they aren't being financed with warehouse lines of credit. These days, the structure appeals to commercial lenders who already have loans on their books. NXT Capital is one of the latest commercial lenders to bring a CLO to market. In an interview with ASR's sister publication Leveraged Finance News, Neil Rudd, NXT's chief financial and administrative officer, explained that the pricing level on their recent deal makes CLOs an attractive financing alternative for NXT. The company would have otherwise relied on equity capital or a line of credit from its own lenders to fund new loans.

Structured settlement ABS is an unsung success story, with charge-offs in single-digit basis points and premiums of more than 100 basis points for 'AAA'-rated bonds. Although this asset class has just over $3 billion of paper outstanding, there remains plenty of potential for growth, John Hintze highlights in his story this month. DBRS puts the total volume of payments that defendants and insurance companies make to injured parties over long periods of time - typically by purchasing an annuity contract - at roughly $100 billion. This is expected to increase by $6 billion to $8 billion each year.

The tone in these two sectors contrasts sharply with that of the broader securitization market, which remains hamstrung by regulation.

In Europe, the current draft of the European Commission's Solvency II Directive to harmonize insurance regulations across the continent, which will introduce new requirements to hold capital against their investments, is close to final. The latest version treats ABS less favorably than government bonds or covered bonds with the same credit ratings, though bankers are holding out hope for a last minute fix.

Added to these onerous regulations is the specter of Greece. Nora Colomer explains that if the country leaves the eurozone, this will expose RMBS deals to currency redenomination risk and, ultimately, defaults.

The somber mood of the securitization market encompasses the Latin American region as well. Felipe Ossa was at the recent Securitization and Structured Finance in Latin America Summit 2012 held by Euromoney Seminars and LatinFinance in Miami. He documents the fact that the region's securitization players woke up to the reality that they have to go beyond just overcoming obstacles in coming to market with deals. They have to create opportunities for both cross-border and local buyers that can make the securitization market in Latin America more liquid and deep.

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